Europe’s credit market may go from red hot to merely boiling in 2020. After a banner year for sales of new bonds, the pace of issuance may prove hard to sustain next year because companies have already rushed to secure super-low borrowing costs ahead of risks such as Brexit.
US borrowers may also touch the brakes after an unprecedented flood helped drive total issuance of high-grade euro corporate bonds to €314bn ($348bn), based on data compiled by Bloomberg.
“It’ll be hard to replicate such a big number,” said Frazer Ross, Deutsche Bank AG’s head of investment-grade syndicate EMEA. He expects issuance “to be down modestly” next year.
The slowdown may be curbed by a jump in redemptions, as well as European Central Bank bond-buying. US issuers are also likely to remain busy, if not at this year’s €80bn plus level, given European investor appetite and the cost advantage of selling bonds in euros instead of dollars.
“We are still looking for a pretty heavy volume of reverse Yankees, just a dip from the ‘off-the-charts’ record set this year,” JPMorgan Chase & Co strategists led by Saul Doctor said in an 2020 outlook. They forecast about €60bn of US issuance next year.
This year’s spike may also herald a more permanent shift in the makeup of euro-bond sales, according to Suki Mann, founder of Creditmarketdaily.com. Reverse Yankees may become 20% to 25% of euro corporate sales in the medium term, up from 12% to 18% previously, he said. The euro bond market’s advantage over dollars, caused by negative interest rates, may also lure borrowers from other parts of the world.
Chinese state-owned companies are one possibility following the nation’s first euro sovereign sale in 15 years, according to Barclays Plc strategists led by Soren Willemann.
Refinancing may support 2020 issuance due to a jump in bonds coming due. High-grade euro corporate maturities surge 21% next year to about €200bn, and keep at that pace over the following couple of years, according to ING Group NV. Still, this boost has been damped by companies such as Coca-Cola HBC AG and ITV Plc selling notes this year to help replace upcoming maturities.
ECB purchases will help mop up new issuance, even if central-bank buying will be less pronounced than in the last round of quantitative easing. The central bank will probably buy €4bn of new notes per month, including reinvestments, barely half the peak of the previous QE, according to Deutsche Bank strategists Michal Jezek and Craig Nicol.
Risks ahead: Risks to issuance include an economic slowdown, particularly from a disruptive Brexit or a ratcheting up of US-China trade tensions. Thin yields and a likely drop in returns could also damp investor demand, according to Deutsche Bank’s Ross.
Average euro high-grade yields are just 0.5%, down from 1.41% in early January, based on a Bloomberg Barclays index. Total returns this year are about 6%, the most since 2014, the data show.
A three-year slowdown in European M&A is also likely to drag on bond sales, even if a pickup in US deal-making could boost reverse Yankee supply, according to ING strategists Timothy Rahill and Jeroen van den Broek. European companies that may sell bonds for M&A next year include Capgemini SE, London Stock Exchange Group Plc and LVMH Moet Hennessy Louis Vuitton SE.
Still, the ING strategists expect tight spreads, refinancing and a reverse Yankee stream to help ensure a busy 2020.
“We forecast new issuance in 2020 to remain very strong,” they wrote in an outlook. “And though it is likely that it will fall short of 2019 totals, it will still be a considerably sizeable level.”
The European Central Bank headquarters building in Frankfurt. The ECB purchases of credit will help mop up new issuance, even if central-bank buying will be less pronounced than in the last round of quantitative easing.